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August 2006

Business Jets and ATC User Fees:


Taking a Closer Look

By Robert W. Poole, Jr.

POLICY
STUDY

347
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Business Jets and ATC User Fees:


Taking a Closer Look

By Robert W. Poole, Jr.

Executive Summary

A merican business depends critically on air transportation, whether it involves employees and
managers on commercial airlines, executives on business jets, or packages and cargo delivered
via cargo plane. Yet the capacity of our aviation infrastructure is not keeping pace with the
projected growth in flight activity over the next 20 years. Without fundamental change, the system
will begin running out of capacity within this decade, and within 20 years untenable delays will
make forced cutbacks in both airline and business jet operations inevitable.

Continued incremental improvements to today’s air traffic control (ATC) system—essentially


retaining the 20th-century model of separating planes by hand—cannot cope with projected aviation
growth. Plans are under way for a completely new, “network-centric” approach that can double or
triple the system’s capacity and dramatically increase its productivity, thereby keeping its cost
affordable. But three obstacles stand in the way of implementing that system:
ƒ A lack of capital funding,
ƒ High implementation risk due to the FAA’s civil-service culture, and
ƒ Political opposition to needed facility consolidation.

Removing ATC from the federal budget process and creating a user-oriented governance
mechanism—known globally as ATC commercialization—can address all three impediments.
Shifting from aviation taxes to direct user payments for ATC services is the essential precondition
for commercialization. It frees ATC from the federal budget process and other federal constraints,
while providing a bondable revenue stream to facilitate needed modernization investment.

Business aviation trade groups such as the National Business Aviation Association (NBAA) and
the National Air Transportation Association (NATA) are opposing ATC user fees, largely out of
concern that they will greatly increase the cost of business aviation. This paper identifies what 15
different business jets currently pay in federal aviation taxes, and then estimates what each would
pay, for the same annual flight activity, under several possible ATC fee regimes. This analysis led
to three important findings.

The first finding is that under today’s tax regime, the same business jet pays three entirely different
amounts to receive exactly the same ATC services, depending on whether it is flown as a
corporate-owned jet, a fractionally owned jet, or an air taxi/charter jet. Charters and fractionals
pay four to five times as much as corporate-owned jets for identical services.

The second finding is that under some types of user-fee regimes (e.g., Canada’s), many business
jets would actually pay less than they do today in aviation taxes, especially fractionals and charters.

And the third finding is that the benefits of shifting from today’s 20th-century, manual-separation
form of ATC to a network-centric system with ample capacity could easily offset the increase in
costs due to a switch to ATC fees. For most corporate jets, if the new system saved as little as 3 to
5 percent of annual flight time (by reducing delays in holding patterns, providing direct routings
and optimal altitudes, etc.), the operating cost savings from fewer flight hours would offset the
small increase in cost per flight hour.

Thus, business leaders should look carefully at the case for ATC reform, of which the shift to ATC
fees is merely the means, not the end. A 21st-century ATC system, with ample capacity, will keep
aviation as the vital business tool it became in the second half of the 20th century. The alternative is
rationing of increasingly scarce airspace capacity, which would have major negative consequences
for American companies and America’s economy.
R e a s o n F o u n d a t i o n

Table of Contents

Introduction: The Looming Aviation Infrastructure Crisis.............................................. 1


The Potential of a Next-Generation System ................................................................. 5
Impediments to the Next-Generation System .............................................................. 8
A. Lack of Funding ................................................................................................................... 8
B. Technology Implementation Risk.......................................................................................... 9
C. Political Constraints............................................................................................................ 10
An Institutional Alternative: ATC Commercialization.................................................. 11
ATC User Fees and Commercialization...................................................................... 13
Estimating the ATC Charges for Business Aviation ...................................................... 15
The Impact of ATC Fees on Business Aviation............................................................ 19
Benefits to Business Aviation ..................................................................................... 21
Summary and Conclusions ........................................................................................ 23
Appendix A: Data Tables .......................................................................................... 25
Appendix B: Frequently Asked Questions about Business Jets and ATC User Fees...... 29
About the Author ...................................................................................................... 33
Other Related Reason Publications............................................................................ 33
Endnotes................................................................................................................... 34
BUSINESS JETS AND ATC USER FEES 1

Part 1

Introduction: The Looming Aviation


Infrastructure Crisis

A merican business depends critically on air commerce. Getting key people where they need to
go, quickly and reliably, requires air transportation. Nearly all companies rely on commercial
airlines for transporting many of their people, and a growing number—of all sizes—make use of
business aviation, including corporate jets and turboprops, air taxi services, and participation in
fractional-ownership programs.

All of aviation depends on having adequate infrastructure within which to operate. Aviation
infrastructure consists of airports and the air traffic control (ATC) system. While the airports are
mostly owned and operated by local governments, the ATC system is owned and operated by the
Federal Aviation Administration (FAA). The FAA does overall planning and forecasting for all
aviation infrastructure, and assists the expansion of airports via grants from the Airports
Improvement Program (AIP).

In the summer of 2000, the aviation system experienced the worst delays thus far recorded, as
flight activity peaked in the end stages of the late-1990s boom. The terrorist attacks in September
2001, and the economic recession of the early years of the new century, led to several years of
decreased air travel activity. However, by 2005 passenger numbers and flight activity had returned
to pre-9/11 levels, and aviation experts were predicting the return of serious summertime
congestion and delays in 2006 and beyond.

Exacerbating the trend is that today’s (and tomorrow’s) passengers are being carried in a larger
number of somewhat smaller planes than was true in the 1990s. Among the factors driving this
trend are the following:
ƒ The increasing market share of low-cost carriers, whose planes are mostly single-aisle, narrow-
body jets(e.g., 737s and A-320s);
ƒ The replacement of mainline airliners (e.g., 737s or 757s) with regional jets on a growing
number of routes, giving passengers greater frequencies for the same amount of seat capacity;
ƒ The migration of some business travelers from commercial airlines to fractional providers and
aircraft charter services, to avoid airport delays associated with increased airport security;
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ƒ The continued growth in corporate aviation, for the same reason; and
ƒ The expected introduction of very light jets (VLJs) in potentially large volumes over the next
decade or two, mostly serving business travelers.

Thus, U.S. aviation infrastructure faces the challenge of coping not only with ever-increasing
passenger numbers, but also with an even faster rate of increase in the amount of flight activity
needed to handle those numbers. Table 1 shows the latest FAA projection of the U.S. turbine-
powered fleet between 2002 and 2017. As can be seen, the total jet fleet increases by 85 percent,
with the number of regional jets up 172 percent and general aviation/air taxi jets up 107 percent by
2017.

Figure 1: FAA Forecast of Turbine Fleet, 2002-2017

2002 fleet 2017 fleet % change from 2002 to 2017


-50.00% 0.00% 50.00% 100.00% 150.00% 200.00%

All jets total 84.8%

GA & air taxi turboprops 52.5%

GA & air taxi jets 106.7%

Regional turboprops -29.4%

Regional jets 171.6%

Cargo jets 27.4%

Large air carrier jets 33.1%

0 5,000 10,000 15,000 20,000 25,000 30,000

Source: FAA 2006 Aviation Forecast

Against this backdrop of large projected aviation growth, the federal government has created an
inter-agency group called the Joint Planning & Development Office (JPDO) to develop a blueprint
for a new-technology approach to aviation infrastructure, dubbed the Next Generation Air
Transportation System (NGATS). One of the JPDO’s initial tasks was to assess the extent of future
demand for air travel activity and compare it with a business-as-usual scenario of modest annual
improvements in airport and ATC capacity.
BUSINESS JETS AND ATC USER FEES 3

In a white paper published in 2005, the JPDO created a baseline demand forecast for the national
airspace system (NAS).1 This initial baseline forecast, for 2014 and 2025, assumed a more or less
unchanged fleet mix. On that basis, it forecast total system operations growing by 20 percent by
2014 and 40-50 percent by 2025. However, an alternative projection factoring in the shift to
smaller aircraft and greater use of secondary airports in larger urban areas produced significantly
higher flight activity.

Next, the white paper looked at projected increases in NAS capacity, based on the ongoing gradual
modernization of the system, as set forth in the FAA’s Operational Evolution Plan (OEP). Since
that business-as-usual modernization adds only modest capacity to the system, when future
performance is simulated, “the demand scenarios [from the baseline analysis] quickly outstrip
current and anticipated NAS capacities . . . [A]t higher levels of demand, system delays quickly
rise over the course of the simulated day to untenable levels.” Figure 2 is taken from the JPDO
white paper. It shows a typical daily (non-summer) delay pattern, hour by hour, in 2004 and
compares that with situations in which demand is 1.2 times as much and 1.4 times as much (as in
the baseline forecasts for 2014 and 2025). As can be seen, delays spill over into the next day even
at demand that is just 1.2 times the 2004 level. The white paper sums up as follows:
These extreme delays indicate that anticipated ‘baseline’ levels of current and future
capacity will be inadequate for providing even minimally acceptable levels of service
quality to NAS users. . . . The baseline futures that attempt to move the anticipated
baseline demand scenarios through a system with anticipated baseline capacity result in
untenable and unrealistic service quality.

What if we don’t expand NAS capacity more than the modest amount of the business-as-usual
scenario? Since neither airlines nor business aviation can operate in a system with out-of-control
delays, the alternative to greater capacity is to ration demand to fit the available capacity. As the
white paper puts it, “When analysis reveals a mismatch between NAS demand and the ability of
the NAS to accommodate that demand, it is necessary to have a procedure or algorithm for
‘trimming’ flights from the initial demand scenario until [the capacity] is able to serve ‘trimmed’
demand while meeting the agreed-upon service quality standard.”

We have already seen the first such instance of rationing. In 2004 as demand exceeded capacity at
busy hours at Chicago O’Hare, the FAA “persuaded” the two largest carriers, American and
United, to cut back the number of flights during peak periods. In addition, business aviation
operators were required to obtain one of a limited number of “reservations” to land or take off from
O’Hare during those hours.

Rationing on a vastly larger scale would be required to avert the results depicted in Figure 2.
Cutting out 30 to 40 percent of flight activity would mean major cuts in both airline service and
business aviation. A basic principle of economics is that when the supply of a valued good or
service is cut back but demand for it remains high, the price will go up. We can therefore expect an
end to the past 25 years of aggressive airline competition leading to affordable airline fares for
ordinary Americans. And we can also expect a sharp cutback in sales of business jets and
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turboprops, as their utility declines due to restrictions on their operations, and higher prices are
charged for air-taxi and fractional air service.

Figure 2: Projected Future Congestion

NOTE: Excessive congestion even at 1.2x leads to some flights not completing by end
of day. Airlines cannot operate at this level of delay.

The cost to the U.S. economy could be enormous. Thomas J. Donohue, president of the U.S.
Chamber of Commerce, has said that unless we act soon to fundamentally address the aviation
infrastructure capacity problem, the consequences could be “devastating.”2 Aviation accounts for
$900 billion in economic activity per year, about 9 percent of our gross domestic product. Hence,
“We must design an airport and air traffic control system with the capacity to safely and efficiently
handle much greater volumes of traffic and cargo.”

For business aviation, the nightmare scenario is what might happen if serious rationing is forced
upon the system. If millions of airline passengers miss their connections or cannot afford to take
their kids to the grandparents’ house for Thanksgiving, their pressure on Congress to give priority
to airline flights rather than “fat-cat, corporate jets” that are seen as clogging up the system could
become intense. It seems likely that business aviation would lose significant political clout under
such circumstances.
BUSINESS JETS AND ATC USER FEES 5

Part 2

The Potential of a Next-Generation


System

T he JPDO is well along in fleshing out a technological and operational concept for what it calls
the “Agile Air Traffic System,” which is the ATC component of the overall Next Generation
Air Transportation System.3 Its basic premise is that the capacity of the system is not some kind of
law of nature; rather, it is a function of both the technology employed and the operational concept
used.

The purpose of air traffic control is to keep planes from running into each other—more technically,
to provide safe separation between planes in all phases of flight (including on the ground). Before
radar was used to separate aircraft, controllers on the ground used “procedural” separation methods
(which are still used today over the oceans in some parts of the world): this means rules about how
far apart planes must stay along a given flight path (in-trail separation) and between different
altitudes. When planes and controllers can only approximately keep track of their latitude,
longitude, and altitude, the rules call for huge separation margins, to allow for large errors. The
introduction of radar over the land area of the United States in the 1950s and 1960s made it
possible to reduce lateral and in-trail spacing, since controllers were able to determine
approximately where each plane was. More recently (within the past few years), more precise
altimeters have made it possible to reduce the vertical separation required at jets’ cruising altitudes,
thereby increasing the number of “flight levels” for the enroute portion of flights. The increasing
availability of GPS units on aircraft (both airliners and business jets) means that pilots themselves
have much more accurate information on where they are, though current ATC practices make very
little use of this capability.

Although the accuracy of information about where planes are has increased over the last several
decades, the fundamental concept of ATC is still the manual model developed prior to World War
II. That is to say, every significant action by a pilot must receive the permission of an air traffic
controller on the ground, who watches a display of traffic and tells the pilot what to do when. Even
though a great deal of “intelligence” is built into most airliners’ flight management system
computers, pilots are not allowed to make use of it, unless the controller gives the OK. And
although controllers’ displays have for the most part been modernized, they have been given very
few automation tools to predict conflicts or to manage large amounts of information in short
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periods of time. Thus, planes are still controlled largely “by hand,” and because of the
understandable limits on how much information a controller can work with at a time, the system
must retain huge separation margins fore and aft, to the left and to the right, and above and below
each plane, to ensure safe operations.

The premise of the next-generation system is that by obtaining and sharing precision information
about planes in flight, we can automate many routine functions, sharing the separation
responsibilities between control centers on the ground and cockpits in the air. Some have termed
this model “network-centric” air traffic management (ATM) as opposed to the traditional human-
centric air traffic control (ATC). If we have far more precise, real-time information about exactly
where each plane is and where it is heading (its intention), finely grained information about
weather conditions throughout the system, and knowledge of the extent and duration of the vortices
that spin off a plane’s wings and can cause hazards to following aircraft during landings and take-
offs, we can fly planes much closer together, safely. And that means the capacity of the system can
be doubled or tripled.

The network-centric model has the potential to hugely improve the quality of air service, both
airline and non-airline. The major breakthrough is to let automation, on the ground and in the
aircraft, perform routine functions and separate aircraft based on their own flight profiles. The
controller’s role changes; while automation manages the flights and monitors conformance with
clearances and planned trajectories, the controller manages exceptions.

On the aircraft, synthetic vision techniques now in field testing will enable planes to land in low-
visibility conditions that today frequently cut airport arrival rates in half. Other new technologies
will provide “precision approaches” to thousands of smaller airports at far less cost than traditional
instrument landing systems. More precise information about planes’ positions and their tip vortices
will make it possible to use closely spaced parallel runways simultaneously, and in some cases
make possible the addition of a parallel runway without having to enlarge the physical land area of
the airport.

Large cost savings should also be possible from shifting to the new model. One premise of the
network-centric approach is that control of aircraft will be possible “from anywhere to anywhere.”
Historically, ATC facilities were located adjacent to the airspace they controlled—a tower had to
be physically on the airport, a TRACON located within the regional airspace it controlled, likewise
for the 21 enroute centers. But satellites, dispersed sensors, and high-speed datalinks mean that
facilities can be located wherever it is cost-effective to do so, and they can be sized to do an
economically efficient amount of work. Some tentative plans call for replacing the FAA’s 21
centers and 171 TRACONs, most of them aging, with 35 new service hubs. Thousands of costly-
to-maintain ground radars and other navigation aids will be able to be retired, too, once planes are
equipped for network-centric operations.

While all the details are not yet finalized, experts from the federal agencies sponsoring the JPDO
(especially NASA and the Departments of Defense and Transportation) agree that the network-
BUSINESS JETS AND ATC USER FEES 7

centric model for ATM can double or triple the system’s capacity, with the resulting operating cost
being no more than (and perhaps less than) that of today’s system. That is a stark contrast to the
dismal vision of the congestion and rationing facing aviation if the business-as-usual approach is
continued.
8 Reason Foundation

Part 3

Impediments to the Next-Generation


System

T he vision of a net-centric ATM system outlined above faces several serious obstacles to
implementation. Some are the normal kinds of resistance to change from those comfortable
with the status quo. The air traffic controllers union, for example, has resisted early moves toward
automation technologies and has made clear its preference to retain a human-centered ATC system
over the next several decades. Also, some aircraft operators (including some airlines and many
private pilots) are resistant to any mandates to install new onboard avionics equipment, even
though full benefits for all system users (e.g., cost savings from being able to retire costly ground-
based navigation aids) will only be realized once all planes in the system are properly equipped—
and once the FAA has done its part, as well.

But there are three more-fundamental obstacles that are more serious threats: lack of funding, high
modernization risks, and political constraints.

A. Lack of Funding

As FAA Administrator Marion Blakey and DOT Secretary Norm Mineta have said repeatedly in
2005 and early 2006, the changes that have taken place in aviation over the past decade have
devastated the FAA’s funding base. The large majority of the agency’s budget (nearly two-thirds
of which is the ATC system) comes from aviation excise taxes. And the lion’s share of that tax
revenue comes from the 7.5 percent tax on the price of airline tickets (as well as on the hourly
charges for charter and fractional-jet services). The long-term trends of declining ticket prices (due
to increased market share for low-cost carriers) and increasing air traffic (due to carrying a given
number of passengers in a larger number of planes) have put a very serious squeeze on ATC
funding. The labor-intensive, human-centric ATC system consumes most of the available budget as
payroll costs. Funding for capital investment ends up getting squeezed. In both fiscal 2005 and
2006, the FAA’s budget for facilities and equipment was reduced by a half-billion dollars below
the authorized levels.
BUSINESS JETS AND ATC USER FEES 9

Transitioning to the next-generation system will require major capital investment over the next two
decades, to install new technologies and to replace numerous obsolescent facilities with a much
smaller number of new ones. But the FAA’s current capital-spending budget is focused on
patching up the existing system, replacing antiquated display consoles with newer ones and
replacing the host computer system. While necessary in the short term, these investments do little
to add capacity to the system—but they are all that can be afforded under the current funding
system. The FAA can barely keep its present systems functional, let alone expand to meet future
demand with all-new facilities and systems.

Some, especially in the general aviation (GA) community, argue that the problem could be solved
if Congress were to appropriate a larger amount of general federal revenue each year, such as 25 to
30 percent of the FAA’s budget (instead of the current level of about 18-21 percent). But given the
enormity of the federal budget deficit problem and the numerous other claims on general-fund
monies, this alternative appears very unlikely to be adopted for a system that (unlike, say, social
service programs or disaster relief) has the potential to raise revenue from its users. This is why
Blakey and Mineta have called funding reform essential for ATC modernization.

B. Technology Implementation Risk

The FAA has been attempting to modernize the National Airspace System, expanding its capacity
and increasing its productivity, since the launch of a major effort called NAS Plan in 1982. During
the nearly 25 years that have elapsed since then, there have been scores (if not hundreds) of reports
from the Government Accountability Office and the DOT Office of Inspector General, faulting the
agency for bad management resulting in projects being chronically late and seriously over-budget.
In 2005 two OIG researchers presented an overview of this failed modernization experience, trying
to assess what went wrong.4 They concluded that modernization efforts did not reduce costs or
increase productivity. And they found that “NAS modernization architecture and project designs
have been consistently subverted by requirements growth, development delays, cost escalations,
and inadequate benefits management. But all these things were symptomatic of the fact that FAA
didn’t think it needed to reduce operating costs.”

Thus, many observers are greatly concerned that the institutional culture of the FAA is poorly
suited to anything as dramatic as the shift from human-centric ATC to network-centric ATM. In
late 2004, the National Academy of Sciences convened an expert panel to assist the GAO in
understanding the cultural and technical factors that have impeded previous ATC modernization
efforts.5 It found that “the key cultural factor impeding modernization has been resistance to
change . . . [which is] characteristic of FAA personnel at all levels.” And “the key technical factor
affecting modernization . . . has been a shortfall in the technical expertise needed to design,
develop, or manage complex air traffic systems.”

The FAA is not designed to take risks, make investments, manage people to produce results,
reward excellence, or punish incompetence. It is therefore not equipped to bring about fundamental
reform of the ATC system. Thus, major institutional change is probably a prerequisite for
implementation of the proposed network-centric ATM system.
10 Reason Foundation

C. Political Constraints

The third impediment to implementing a fundamentally different approach is political. The


network-centric model can deliver major cost savings, ultimately providing two to three times the
ATC capacity with the same or fewer people, thanks to the changed paradigm that makes the
operations dramatically less labor-intensive. But to realize these gains requires the relatively swift
retirement of huge numbers of costly-to-maintain radars and other ground-based navaids and the
consolidation of numerous ATC facilities. One current proposal would replace 21 enroute centers
and 171 TRACONs with 35 air traffic service hubs, while redesigning all U.S. airspace.6 Physical
control towers located at each airport would gradually be phased out, with “virtual tower”
functions built into the new super-hubs.

As with the closing of military bases, Congress has a history of resisting the closure and
consolidation of ATC facilities. The original 1982 NAS Plan included plans for facility
consolidation, which were quietly dropped after it became clear that getting them through Congress
would be very difficult. The FAA’s recent success in outsourcing its Flight Service Station system
(which involved consolidating from 58 to 20 facilities) came very close to being forbidden by
Congress, with that prohibition ultimately being defeated thanks to a credible veto threat from the
White House. Many observers expect that if facility consolidation of the magnitude being
considered for the next-generation system were left to the annual appropriations process, it would
likely suffer the same fate as the consolidations proposed in the NAS Plan.
BUSINESS JETS AND ATC USER FEES 11

Part 4

An Institutional Alternative: ATC


Commercialization

O ne approach to addressing all three of the impediments discussed above is to take the ATC
system out of the federal budget process and make it a self-supporting entity, paid for
directly by its customers (analogous to the Tennessee Valley Authority or the U.S. Postal Service).
Variants of this approach have been recommended by a series of federal studies and commissions
over the past 15 years, including:
ƒ The Aviation Safety Commission in 1988;
ƒ The National Commission to Ensure a Strong Competitive Airline Industry in 1993;
ƒ The National Performance Review in 1993;
ƒ The Secretary of Transportation’s Executive Oversight Group in 1994;
ƒ The National Civil Aviation Review Commission (Mineta Commission) in 1997.

This approach would address the funding problem by shifting from aviation excise taxes paid to the
Treasury and appropriated annually by Congress to fees for ATC services paid directly by
customers to the air navigation service provider (ANSP). Thus, the fees would grow in proportion
to the growth of flight activity, rather than being tied to something much less relevant, such as the
current airline fare level. Moreover, a predictable revenue stream (not subject to the federal budget
process) would provide the basis for issuing long-term revenue bonds to fund modernization, such
as the transition to the network-centric system.

The commercialization approach would address the cultural and technical obstacles by motivating
the ANSP to attract and retain managers and engineers from the private sector skilled at
implementing complex technology projects. And with a board of directors largely representing the
ANSP’s aviation customers, the modernization concept (the network-centric system) and
individual projects would have to pass muster as delivering real value for the investment. That kind
of vetting process is largely absent from today’s FAA.

In addition, this approach would address the political obstacles (to retiring navaids and
consolidating facilities) by Congress having delegated these contentious issues to a user-governed
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ANSP. To be sure, getting Congress to vote for such delegation is no small challenge. But once
accomplished, it would be difficult for Congress to intervene to micro-manage these changes, as
this might threaten the ability of the ANSP to issue the bonds needed to fund the modernization.

That ATC commercialization can accomplish these things is not simply a plausible theory. Over
the past 15 years, more than 40 countries have implemented some version of ATC
commercialization, with organizational forms ranging from a not-for-profit, user-governed
corporation (Canada) to numerous government corporations (e.g., Australia, Germany) to a self-
supporting government department (France).

A major international study of the ATC commercialization experience was released in January
2006.7 The study team did detailed research on 10 commercialized ANSPs spanning the range of
organizational models, collecting both interview and quantitative (historical trend) data on each. A
very brief summary of its principal findings is that commercialization had the following effects:
ƒ On safety: either neutral or positive;
ƒ On modernization: greatly improved;
ƒ On service quality: improved;
ƒ On costs: generally reduced, significantly in some cases;
ƒ Financial stability: maintained;
ƒ Public interest: most areas neutral or positive.

Thus, both theory and practice suggest that shifting to some version of commercialization would
address all the principal impediments to implementing the network-centric model for ATC
modernization. Users would see exactly what they will get for spending more, since those costs
must be recovered in fees and charges. This kind of transparency is lacking in today’s FAA.
BUSINESS JETS AND ATC USER FEES 13

Part 5

ATC User Fees and Commercialization

U .S. aviation stakeholders have recently been debating whether or not to shift from aviation
excise taxes to direct fees for ATC services. Some have suggested finding some way to
dedicate the revenue from one of the existing taxes to support some form of bonding for ATC
projects. But such half-way measures would do nothing to address the other two impediments
discussed above (the need to change the corporate culture and the need to overcome ongoing
political obstacles). In this context, it is worth noting that the January 2006 report on international
ATC commercialization considered “financial autonomy in its governance arrangements” as the
minimal prerequisite for an ANSP to be considered commercialized.

Every one of the U.S. reports on reforming the ATC system cited in the previous section
recommended a shift from tax funding to user-fee funding. Indeed, the 1997 Mineta Commission
report went into great detail on the rationale for user fees. Among the reasons it cited were the
following:

To provide for a self-sufficient ATC operation, at a funding level driven by the needs and level of
aviation activity. This can only be ensured by removing ATC funding from the constraints of the
federal budget process.

To provide a reliable revenue stream against which long-term bonds for modernization can be
issued. As the Commission report put it, “Borrowing is not an option but a necessity for a capital-
intensive enterprise, especially in technology transitions.”

To improve the productivity of the ATC system by better targeting investment to benefit system
users. The Commission report noted that “Revenue streams will serve as signals [to the ANSP] as
to where improvement is needed or demand is not being met.”

To provide incentives for customers to equip their aircraft with important new technologies. Both
Nav Canada and Eurocontrol are giving discounts on enroute charges to planes equipped with
controller-pilot datalink and ADS-B, two key enabling technologies for the network-centric
system.
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To increase fairness in paying for air traffic control. Under the current tax-based system, different
types of users pay vastly different amounts for the same ATC services.

To develop a customer-focused corporate culture. The keynote of the reform that led to
transforming the Canadian ATC system into Nav Canada was the slogan: “User pay means user
say.” There is no substitute for a true customer-provider payment nexus in focusing an
organization’s culture on meeting the real needs of its customers.

The commercialized ANSPs in other countries were created to overcome the kinds of obstacles
discussed previously. And the international study noted above found that they are succeeding.
Financial self-sufficiency and organizational separation (in most cases) from the government
bureaucracy has led to significant organizational and managerial changes. Typically, a
commercialized ANSP exists outside the government civil service system. It is governed by a
board of directors, which can hire and fire the CEO, as in a normal business. The board approves
the annual budget and the capital expenditure program. The ANSP is regulated for safety, at arms-
length, by the equivalent of our FAA. And the fee structure is subject to some form of
governmental oversight, to ensure that all aviation customers are dealt with fairly. This new form
of governance substitutes for the kind of direct operational and budgetary oversight traditionally
exercised by congressional committees over the FAA’s ATC operations.
BUSINESS JETS AND ATC USER FEES 15

Part 6

Estimating the ATC Charges for


Business Aviation

H istorically, the general aviation (GA) community has opposed any effort to replace aviation
excise taxes with user fees. While many specific objections have been raised, the underlying
concern is that replacing the traditional fuel tax with fees based on the cost of service and the
amount used would increase the cost of flying, putting the viability of general aviation at risk.

Before proceeding with this discussion, we must first unpack the term “general aviation” into its
component parts. In most of the world, the distinction is made between business aviation (which is
nearly all turbine-powered, and makes extensive use of ATC services and controlled airspace) and
recreational aviation (which is mostly piston-powered and flies mostly in non-controlled airspace).
No one is proposing to impose user fees on recreational aviation, which is ably represented by the
Aircraft Owners & Pilots Association (AOPA) and the Experimental Aircraft Association (EAA).
That segment of the GA community is not relevant to this discussion.

The second key point is that there is not a single ATC user-fee proposal on the table; rather, there
are a number of possibilities. The Air Transport Association in March 2006 unveiled its Smart
Skies proposal, under which business aircraft would pay the same rates per departure and per hour
enroute as any other aircraft in the system. Each plane in controlled airspace would pay the average
cost of controlling all of them, making this a cost-based system, as called for by DOT and FAA
leaders. (In the following discussion, we will refer to this type of approach as a “full-cost” fee.)

Most other countries follow general guidelines from the International Civil Aviation Organization.
ICAO calls for using weight and distance as the key parameters on which to base ATC charges,
typically suggesting that both be used for enroute charges and weight alone be used for terminal-
area charges. This type of approach is less directly related to the cost of providing ATC services.
The purpose of including aircraft weight (typically maximum take-off weight) in the formula is to
provide a pragmatic adjustment for differences between large and small planes in willingness or
ability to pay. Nav Canada’s system, familiar to many U.S. pilots, is an example. It should be noted
that how weight enters the formula can make a big difference in how much it affects the result.8
16 Reason Foundation

As of this writing, the FAA’s funding proposal has not been released, but we expect it will
incorporate elements of both the “full-cost” and “weight-based” approaches.

To show how these different approaches to ATC fees would affect business aviation, we selected
15 business jets, from the Eclipse 500 on the smallest end of the spectrum to the Boeing BBJ (a
modified 737) on the top end. Their basic parameters are shown in Table 1. We obtained data from
the Conklin deDecker database to calculate what these planes pay now in aviation excise taxes,
depending on how they are used. That database assumes that each plane is flown a standard
175,000 nautical miles (nm) per year, and the annual hours flown is derived from that, based on
each plane’s performance characteristics. The database also includes both the variable cost per
hour to operate the plane and the annualized total cost per hour (assuming market depreciation).

Table 1: Business Jets Used for Analysis


Category Model Seats MTOW Range Annual Hours/ Var Total
(lbs) (nm) nm Year cost/hr cost/hr
VLJ Eclipse 500 4 5,680 1,280 175,000 572 $525 $920
Small Learjet 35A 6 18,300 1,930 175,000 408 $1,786 $2,835
Citation II 7 14,100 1,220 175,000 526 $1,399 $2,230
Beechjet 7 16,100 1,180 175,000 425 $1,500 $2,666
400A
Medium Learjet 60 6 23,500 2,186 175,000 411 $1,710 $3,639
Citation 9 30,000 2,643 175,000 429 $1,760 $3,905
Sovereign
Hawker 800 8 27,400 2,390 175,000 455 $1,926 $3,403
Large Challenger 9 41,250 2,800 175,000 433 $3,320 $5,139
600
Citation X 8 35,700 2,890 175,000 372 $2,483 $5,697
Falcon 900C 12 45,500 3,450 175,000 419 $2,336 $6,223
Gulfstream 13 73,900 3,880 175,000 413 $2,844 $7,080
G-450
Ultra Global 13 95,000 5,940 175,000 408 $3,156 $8,420
Express
Gulfstream 13 90,500 6,250 175,000 403 $3,193 $7,915
G-V
Airbus Corp. 18 166,450 6,100 175,000 433 $4,095 $9,497
Jet
Boeing BBJ 18 171,000 6,171 175,000 458 $4,104 $9,593
Source: The Aircraft Cost Evaluator, Conklin & deDecker, Fall 2005
BUSINESS JETS AND ATC USER FEES 17

The analysis that follows presents summary tables in the text, but the reader will find the complete
tables, listing the results for all 15 business jets, in Appendix A.

In Table 2 we calculate what these planes pay in current aviation excise taxes, based either on the
fuel used or the price paid by passengers. This depends on whether it is operated as a corporate-
owned plane, flown as part of a fractional-ownership program, or chartered from an air-taxi
company. The first pays only a fuel tax, at 21.8 cents/gallon. The second and third pay 7.5 percent
of the hourly charge to use the plane, plus $3.20 per person per segment flown. For fractionals and
charters, the amounts of tax differ because hourly charter rates are significantly higher than hourly
fractional rates. Table 3 summarizes what the average plane in each size category pays in current
aviation taxes, based on the assumed annual hours flown (and a standardized set of trips for the
fractional and charter users).9 As can be seen, the same plane, flying the same number of miles and
hours in the ATC system, pays dramatically different amounts depending on who is operating it.

Table 2: Current Aviation Taxes Paid by Business Jets (Annual)


Category Corporate Fuel Tax Fractional Tax Charter Tax
Small $20,564 $54,919 $74,064
Medium 24,330 67,986 111,686
Large 34,854 81,331 161,614
Ultra 59,328 117,020 306,684
Sources: Netjets, EJM, plus author calculations (based on details in Table A-1)

To compare the impact of possible ATC user fees with current aviation taxes, we have selected two
different user-fee models: a full-cost model and a weight-distance model. The former represents a
form of average-cost-based charging, while the latter is more typical of the pragmatic overseas
approach. The full-cost model used here is based on the FAA’s ETMS dataset for FY2004.10 It is
designed to recover the full $8.1 billion budget of the FAA’s Air Traffic Organization, with
terminal charges accounting for 55 percent of the total and enroute charges the other 45 percent
(which are the cost shares produced by current ATO cost modeling). Enroute charging is based on
great circle mileage between origin and destination, at a rate of $.4432/mile. For these calculations,
we use the same simplified model of short trips (BOS-ORD) and long trips (LAX-IAD) used
previously for the fractional and charter categories to estimate their annual excise tax payments.
For the weight-based model, we used the current Nav Canada formula for trips equal in distance to
BOS-ORD and SFO-IAD.

As can be seen in Table 3, because the smaller jets fly only shorter trips, they make many more
departures per year to fly their standard 175,000 nm. Thus, their annual charge using the full-cost
model is higher than that of the larger jets that fly a mix of longer and shorter trips. The weight-
based system produces quite different results, with the annual total increasing with the size of the
plane from an average of $45,000 for the Small category to $146,000 for the largest.
18 Reason Foundation

As can be seen, for corporate-owned jets, the annual cost of ATC fees is higher in every case than
the current annual cost of the fuel tax. For fractionals, in most cases the weight-distance type fee
would be less costly than the current aviation taxes. And in every case charter users would pay less
under the weight-distance type fee than they currently pay in taxes. The full-cost-type fees would
be less than current taxes for the higher-end jets in charter operations.11

Table 3: Hypothetical ATC Fees vs. Current Aviation Taxes (Annual)


Category Hypothetical Hypothetical Current Current Current
Full-Cost Fee Weight- Corporate Fractional Charter Tax
Distance Fee Fuel Tax Tax
Small $149,124 $45,280 $20,564 $54,919 $74,064
Medium 116,876 51,499 24,330 67,986 111,686
Large 116,876 75,328 34,854 81,331 161,614
Ultra 116,876 146,400 59,328 117,020 306,684
Source: author calculations (based on detail in Table A-2)
BUSINESS JETS AND ATC USER FEES 19

Part 7

The Impact of ATC Fees on Business


Aviation

T he answer to the question, “What impact would ATC user fees have on business aviation?” is
clearly: It depends. Contrary to statements made by leaders of the National Business Aviation
Association and the General Aviation Manufacturers Association, various categories of business
aviation could pay more or less than they currently pay in aviation excise taxes depending on the
formula selected for user fees,

The first point to keep in mind in thinking about this question is that “business aviation” is not a
single entity. To be sure, all three main categories—corporate, fractional, and charter—are
economic substitutes for one another to a certain degree, and hence competitors to a certain degree.
Twenty-five years ago, the fractional market did not exist, and the charter market was much
smaller than it is today. As of 2004, according to FAA figures, business jet fractional and charter
categories constituted 7.3 percent of the flight activity in controlled airspace, nearly as much as the
8.3 percent flown by corporate jets. Yet we can see from Table 3 that the same jet flying the exact
same number of flights per year would pay three very different amounts under the current tax
regime. Apart from any comparisons with what airline aircraft pay, it is not clear why a business jet
should pay three entirely different amounts to use the exact same ATC services depending on its
ownership arrangements.

A major concern raised by NBAA and others is that a user-fee system would so increase the cost of
business flying as to seriously damage the industry. This claim also deserves closer scrutiny. To do
this, we have created Table 4, which compares the total hourly cost to own and operate a business
jet with the hourly cost of fuel and the hourly impact of our two hypothetical user fees. Fuel cost
has increased dramatically between 2000 and 2005. We compare the difference in the hourly cost
of fuel—which the business aviation market has absorbed without serious impact—with the per-
hour cost of the two possible user fees. For the full-cost-type fee, the amount of the fee is
significantly less than the change in fuel cost, for all but the smallest jets. And for the weight-
distance-type fee, the hourly cost is far less than the change in cost of fuel.
20 Reason Foundation

Table 4: Cost Comparisons, per Flight Hour


Category 2005 Fuel 2000 Fuel Difference Full-Cost Fee Weight-
Cost Cost Distance Fee
Small $855 $527 $338 $333 $102
Medium 1044 643 401 271 119
Large 1580 974 606 286 184
Ultra 2561 1578 983 276 342
Source: author calculations (based on details in Table A-3)

Figure 3 shows the wholesale price of Jet-A fuel and annual sales of business jets for the past 25
years. During the 1980s and the first half of the 1990s, the fuel price trended slightly downward,
while jet sales fell from a peak in 1981 and remained relatively flat until the mid-1990s. At that
point they took off, peaking in 2001 while fuel prices began increasing. Jet sales fell about 25
percent in the post 9/11 recession, but have modestly recovered in 2004 and 2005, despite the
soaring cost of fuel. That business aviation remains robust despite an increase of several hundred
dollars per hour in operating cost since 2000 underscores the business case for these important
planes. But it also calls into question the idea that another 5 percent increase in total hourly cost for
corporate jets (as with a shift to user fees) would devastate the industry.

Figure 3: Wholesale Jet Fuel Price vs. Business Jet Sales, 1980-2005

900 200
Wholesale jet fuel price
Business jets delivered
800 180

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120 Refinery Price (cents/gallon)


Jets delivered

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BUSINESS JETS AND ATC USER FEES 21

Part 8

Benefits to Business Aviation

T he discussion in the previous section was intended to show that a user-fee system for ATC can
be developed that would have only modest cost impacts on business aviation; indeed, if it were
of the weight-distance type, it could end up reducing the cost for the nearly half of business
aviation consisting of fractional and charter operators.

But is that sufficient reason for business aviation (or subsets thereof) to support such a change? If
the only change to occur were the replacement of aviation excise taxes with ATC user fees, the
answer is not necessarily yes. The case for shifting to fees for service as the new way of funding
ATC rests on the arguments made earlier, in Parts 1 through 5. Specifically, the argument is that
unless we find a way to double or triple the capacity of the ATC system, we are within a decade of
rationing airspace capacity. Shifting to a funding and governance model based on direct payments
for ATC services and bonding for needed capital expenditures is the most plausible way to
overcome the obstacles to implementing the network-centric system that will provide the needed
capacity.

Thus, business aviation should support the shift to user fees if it is part of a comprehensive reform
of ATC, drawing on the lessons from Canada and other countries that have made this transition
successfully. User fees are not the end goal: they are a critical means to the end goal. And that end
goal is a network-centric air traffic management system that provides ample capacity for all of
aviation.

That transition offers major benefits to business aviation. Whether corporate-owned, fractional, or
air-taxi/charter, the operators would nearly always be able to “fly direct” using the cost-minimizing
route of their choice. Precision approaches would be available at thousands of smaller airports,
opening them up to all-weather operations by business jets of all types. Dispatchers of fractional
and charter fleets would gain powerful tools for staging their fleets more efficiently, with a direct
impact on the bottom line.

As noted previously, fractional and charter operators might well pay less under some forms of user
fee than they pay today under the ticket tax and segment-fee system. So they could be made better
off economically by the transition, even if they did not reap operational benefits of the kind just
noted. The harder case is corporate-owned jets, which would pay more than today’s fuel tax under
22 Reason Foundation

any likely user-fee scenario. But that is before we take account of the value of the benefits they
would reap from a network-centric system.

One measure of those benefits is the value of time saved, thanks to avoidance of delays that would
occur in an unreformed system. The data previously assembled make it easy to do a break-even
calculation, to estimate the point at which the value of time savings from a better system offsets the
increased cost per flight hour that the corporate jet would have to pay. The break-even equation is
of the form:

Value of time saved = (Hours saved) x (variable cost/flight hour)


Marginal cost of the change = (user fee/hr minus fuel tax/hour) x (annual flight hours)

We use the data from the previous table to solve for the number of hours saved, H, at which these
two are equal, using the weight-based version of the user fee. If the annual time savings are greater
than H, the corporate jet operator experiences net operating cost savings, even after paying the user
fee instead of the fuel tax.

Table 5: Delay Reduction Needed for Net Cost Savings, Corporate-Owned Jets
Category Flight Hours Variable Net Increase Breakeven Breakeven
per Year Cost/hr. in ATC Hours Saved Percent of
Cost/hr. Total
Small 453 $1562 $56 15.7 3.5
Medium 432 1799 63 15.3 3.6
Large 409 2746 99 14.8 3.6
Ultra 426 3637 203 23.8 5.6
Source: author calculations (based on details in Table A-4)

As can be seen in Table 5, if the user-fee system is similar to that of Nav Canada, these corporate
jets would experience net savings in annual operating cost if the network-centric system saved
them as little as 3 to 5 percent in annual flight hours by reducing or eliminating indirect routings,
diversions, holding patterns, etc.

This analysis does not include the value of time saved by senior corporate executives, which is
another real benefit of operating in the next-generation system. The main rationale for business
aviation is to make better use of key people’s time. But that benefit is seriously at risk if the ATC
system is not transformed along the lines suggested here.
BUSINESS JETS AND ATC USER FEES 23

Part 9

Summary and Conclusions

T his paper has attempted to make the case that America’s business leaders should support
fundamental reform and modernization of the air traffic control system, in order to prevent its
imminent breakdown and permit the timely doubling or tripling of its capacity. A key enabler in
making this transition happen in a timely fashion is shifting the basis for funding from aviation
excise taxes, paid to the Treasury and controlled by Congress, to a system in which fees are paid
directly to the air traffic control provider for the services it delivers. The logic runs as follows:
ƒ The ATC status quo of incremental improvements in the labor-intensive separation of aircraft
by hand cannot cope with the large projected growth in jet aviation, a large portion of which
consists of business aviation.
ƒ A completely new, network-centric approach to air traffic management can provide the needed
capacity growth, along with large productivity gains, keeping the cost affordable.
ƒ But several major impediments—lack of funding, high implementation risk given the FAA’s
current culture, and political opposition to facility consolidation—make implementation of that
system unlikely.
ƒ Removing ATC from the federal budget process, and creating a user-oriented governance
mechanism—known globally as ATC commercialization—can address all three impediments.
ƒ Shifting from aviation taxes to direct payments to the ATC provider for services rendered (user
fees) is the essential precondition for commercialization.

Our analysis has demonstrated that some forms of ATC user fee would have significantly less cost
impact on most business jet operations than other forms. Indeed, for fractional and charter
operations, a fee structured like that of Nav Canada could cost those users about one-third less per
year than the current aviation excise tax structure. And even for business jets that are part of a
corporate fleet, that type of ATC fee would be a break-even proposition, compared with today’s
fuel taxes, if the new network-centric ATC system reduced unnecessary flight hours by as little as
3 to 5 percent.
24 Reason Foundation

This analysis therefore suggests that America’s business leadership should question the all-out
opposition to any consideration of ATC user fees, as currently espoused by the leading business
aviation trade groups: GAMA, NBAA, and NATA. Their position does not properly reflect the
possible direct cost savings to fractional and air-taxi operators from weight-based forms of ATC
fees, compared to the current aviation taxes paid by those users. And it does not reflect the longer-
term gains to owners of corporate fleets from a modernized ATC system with double or triple the
capacity of today’s congested system.
BUSINESS JETS AND ATC USER FEES 25

Appendix A

Data Tables
Table A-1: Current Aviation Excise Taxes Paid by Business Jets
Model Gals/hr Fuel tax/yr Fract rate Fract Charter Charter
/ hr tax/yr rate / hr tax/yr
Eclipse 500 63 $7,856 $500* $23,492 $750* $34,231
Learjet 35A 229 $20,368 $1,500 $47,974 $2,060 $65,133
Citation II 181 $20,755 $1,400 $57,317 $1,854 $75,251
Beechjet 400A 222 $20,568 $1,800 $59,465 $2,500 $81,807
Learjet 60 247 $22,131 $2,000 $62,838 $3,150 $98,334
Citation Sovereign 267 $24,970 $2,150 $70,374 $3,938 $127,980
Hawker 800 261 $25,889 $2,038 $70,745 $3,150 $108,743
Challenger 600 352 $33,227 $2,300 $75,898 $4,620 $151,341
Citation X 386 $31,303 $2,338 $66,423 $4,200 $118,442
Falcon 900C 328 $29,960 $2,400 $76,627 $5,720 $181,097
Gulfstream G-450 499 $44,927 $3,394 $106,375 $6,270 $195,578
Global Express 535 $47,585 $3,500 $108,349 $8,800 $270,745
Gulfstream G-V 503 $44,191 $3,476 $106,308 $8,800 $267,441
Airbus Corp. Jet 740 $69,852 $3,600 $118,172 $10,000 $326,289
Boeing BBJ 758 $75,682 $3,900 $135,250 $10,500 $362,262
*Author estimate; no rates yet available
26 Reason Foundation

Table A-2: Hypothetical ATC Fees, vs. Current Aviation Taxes


Model Hypothetical Hypothetical Current Fuel Current Current
Full-Cost Wt-Dist Tax/yr Fractional Charter
Fee/yr Fee/yr Tax/yr Tax/yr
Eclipse 500 $149,124 $22,834* $7,856 $23,492 $34,231
Learjet 35A $149,124 $49,396 $20,368 $47,974 $65,133
Citation II $149,124 $41,474 $20,755 $57,317 $75,251
Beechjet 400A $149,124 $44,969 $20,568 $59,465 $81,807
Learjet 60 $116,876 $47,424 $22,131 $62,838 $98,334
Citation Sovereign $116,876 $55,104 $24,970 $70,374 $127,980
Hawker 800 $116,876 $51,968 $25,889 $70,745 $108,743
Challenger 600 $116,876 $67,712 $33,227 $75,898 $151,341
Citation X $116,876 $61,568 $31,303 $66,423 $118,442
Falcon 900C $116,876 $72,256 $29,960 $76,627 $181,097
Gulfstream G-450 $116,876 $99,776 $44,927 $106,375 $195,578
Global Express $116,876 $118,208 $47,585 $108,349 $270,745
Gulfstream G-V $116,876 $114,432 $44,191 $106,308 $267,441
Airbus Corp. Jet $116,876 $174,720 $69,852 $118,172 $326,289
Boeing BBJ $116,876 $178,240 $75,682 $135,250 $362,262
Source: author calculations

*Author estimate; no rates yet available.


BUSINESS JETS AND ATC USER FEES 27

Table A-3: Hourly Cost Comparisons


Model Total 2005 Fuel 2000 Fuel Diff: ’00- Full-Cost Wt-Dist
Cost/hr. Cost/hr Cost/hr ‘05 Fee/hr Fee/hr
Eclipse 500 $920 $255 $157 $98 $261 $40
Learjet 35A $2,835 $930 $573 $357 $365 $121
Citation II $2,230 $735 $453 $282 $284 $79
Beechjet 400A $2,666 $901 $555 $346 $351 $106
Learjet 60 $3,639 $998 $615 $383 $284 $115
Citation Sovereign $3,905 $1,079 $665 $414 $272 $128
Hawker 800 $3,403 $1,054 $649 $405 $256 $114
Challenger 600 $5,139 $1,422 $876 $546 $270 $156
Citation X $5,697 $1,559 $960 $599 $314 $166
Falcon 900C $6,223 $1,325 $816 $509 $279 $172
Gulfstream G-450 $7,080 $2,016 $1,242 $774 $283 $242
Global Express $8,420 $2,161 $1,331 $830 $287 $290
Gulfstream G-V $7,915 $2,032 $1,252 $780 $290 $284
Airbus Corp. Jet $9,497 $2,990 $1,842 $1,148 $270 $404
Boeing BBJ $9,593 $3,062 $1,886 $1,176 $255 $389
Sources: Conklin & deDecker, Aviation Research Group/U.S. Inc. (ARG/US), author calculations
28 Reason Foundation

Table A-4: Delay Reduction Needed for Net Cost Savings, Corporate Jets*
Model Hours/yr $Var Cost Net Increase Break-even % Flight Hrs
per Flight hr in ATC Hrs Saved Saved
Cost/hr
Eclipse 500 572 $525 $26 29 5.0%
Learjet 35A 408 $1,786 $71 16 4.0%
Citation II 526 $1,399 $39 15 2.8%
Beechjet 400A 425 $1,500 $57 16 3.8%
Learjet 60 411 $1,710 $62 15 3.6%
Citation Sovereign 429 $1,760 $70 17 4.0%
Hawker 800 455 $1,926 $57 14 3.0%
Challenger 600 433 $3,320 $80 10 2.4%
Citation X 372 $2,483 $81 12 3.3%
Falcon 900C 419 $2,336 $101 18 4.3%
Gulfstream G-450 413 $2,844 $133 19 4.7%
Global Express 408 $3,156 $173 22 5.5%
Gulfstream G-V 403 $3,193 $174 22 5.5%
Airbus Corp. Jet 433 $4,095 $242 26 5.9%
Boeing BBJ 458 $4,104 $224 25 5.5%
Source: author calculations

*Assuming a weight-distance charging formula similar to Nav Canada’s


BUSINESS JETS AND ATC USER FEES 29

Appendix B

Frequently Asked Questions about


Business Jets and ATC User Fees
1. Wouldn’t switching from current aviation taxes to ATC user fees seriously harm business
aviation?

That depends on the user-fee formula and how the hourly cost of user fees compares to the hourly
cost of current taxes. It is quite possible that the hourly cost for fractional and charter users would
be lower than the current 7.5 percent tax plus segment fee. For example, under the user-fee formula
used by Nav Canada, fractional and charter jets would pay less than they do under the current U.S.
aviation tax structure. And even though corporate-owned jets would probably pay more under any
likely user-fee formula, they would also benefit from the reduced delays that a next-generation
ATC system would provide.

2. Isn’t the FAA’s funding crisis exaggerated or non-existent?

No, it’s very real, based on fundamental changes in commercial aviation. An ever-larger number of
passengers is being transported in smaller and smaller-size aircraft, thanks to airlines substituting
narrow-bodies for wide-bodies, the replacement of narrow-bodies by regional jets, and the healthy
growth of business aviation, including fractional ownership. These trends all mean more aircraft in
the ATC system, increasing its workload and cost. But the primary funding source is based on a
percentage of the ticket price, which continues to trend downward thanks to continued robust
competition. The FAA Vice President for Finance, Gene Juba, has concluded that these structural
changes require the agency to develop a funding mechanism based on ATC workload rather than
ticket prices.

3. Couldn’t we solve the funding problem by increasing the fraction of FAA budget that comes
from the general fund from the current 20 percent to 30 percent?

First, in the context of large federal deficits as far as the eye can see, increasing general-fund
support for any federal program is highly unlikely—especially if that program has identifiable
users who can be charged for its services. Second, even if this could be done, it would do nothing
to enable long-lived capital expenditures for the next-generation ATC system to be financed by
30 Reason Foundation

issuing revenue bonds; doing that requires a reliable revenue stream that is not subject to the risks
and uncertainties of annual appropriations. Third, creating a customer-provider relationship is the
key to reforming the governance of the ATC system, so that cost control and a clear business case
for each new investment become standard practice. The general fund should continue to support
the FAA’s vital air-safety functions, including the operations of the Flight Service Stations that
assist general aviation pilots.

4. The ATC system was designed for airline use. Since business aviation is a marginal user, why
should it pay for services designed to serve airline needs?

This may have been the case at one time, but today and in coming decades, business aviation is and
will be a major user of ATC services, flying in the same controlled airspace and using the same
TRACONs and Centers. In recognition of business aviation’s key role in the ATC system, its
major trade association (NBAA) shares space in the FAA’s nationwide ATC command center on
an equal basis with the airline trade association (ATA). Likewise, it should be fully represented on
the board of directors of a reformed ATC provider, making the critical decisions on modernizing
and managing the next-generation system.

5. Europe charges fees to ATC users but has a much smaller business aviation sector than the
United States. Doesn’t this prove that ATC user fees are harmful to business aviation?

Eurocontrol says that business aviation is “a prime contributor to the growth of air traffic on the
continent,” growing faster than all other instrument flight rules (IFR) traffic. Aviation Week reports
that the rapid growth of business aviation is one of the factors behind the drive for a next-
generation Europe-wide ATC system. Warren Buffett told shareholders in February 2006 that
NetJets increased its European business by 37 percent in 2005. It seems clear that ATC fees are not
holding back the growth of business aviation in Europe.

6. Isn’t business aviation better off if Congress continues to be the de-facto board of directors of
the ATC system?

ATC is a multi-billion dollar 24/7 high-tech service business. It needs to be governed by people
highly knowledgeable about aviation, management, technology, and service businesses. Members
of Congress are generalists, and are driven by political considerations, such as jobs in their
districts, rather than what is in the long-term interest of aviation users: an ATC system that has
plenty of capacity and that delivers greater value to its customers. Dozens of other countries have
made ATC self-supporting from fees and charges, with a real board of directors empowered to act
for the best interests of the ATC customers.

7. Won’t the airlines dominate any ATC system board of directors, giving short shrift to the
interests and concerns of business aviation?
BUSINESS JETS AND ATC USER FEES 31

A commercialized ATC system can only come about if Congress enacts enabling legislation. In
doing so, Congress could spell out the requirements for a stakeholder board, balanced carefully to
represent all segments of aviation. In 2001 Reason Foundation suggested one possible structure for
such a board:
ƒ 4 seats for airlines (legacy, low-cost, regional, cargo)
ƒ 3 seats for general aviation (business, recreational, charter/fractional)
ƒ 1 seat for airports
ƒ 1 seat for employees
ƒ 2 seats for the federal government (Defense, Transportation)
ƒ 3 seats for the general public (air travelers)
ƒ 1 seat for the CEO.

The first 11 of these would select the three general public members, and those 14 would hire the
CEO, who would become the 15th board member. Clearly, governance can be structured to
represent all sectors of aviation. A board structure along these lines has worked quite well at Nav
Canada for the past 10 years.

8. Wouldn’t it be costly and cumbersome to collect ATC user fees?

Since nearly all countries except the United States charge user fees for ATC services, it’s easy to
answer this question. In Europe, enroute charges are billed and collected by Eurocontrol. The
annual cost of billing and collection is three-tenths of 1 percent of the amount billed. In Canada,
the private, nonprofit Nav Canada’s billing costs are about two-tenths of 1 percent. Billing would
be based on standard parameters, such as great circle distance between origin and destination,
flight time, or gross take-off weight—all factors already in electronic form as part of flight plans.
Billing operations could potentially be contracted out to commercial service providers, rather than
building up in-house expertise.

9. What about high-end piston planes that fly in controlled airspace only some of the time?

Nearly all current user-fee proposals call for no ATC fees for the vast majority of piston planes,
which are used primarily for recreational flying and mostly under visual flight rules (VFR). These
planes would continue to pay a fuel tax to help support the Airport Improvement Program from
which they benefit. Nav Canada offers a workable approach for high-end piston planes that fly IFR
some of the time. They pay a modest annual fee (on a sliding scale, based on aircraft weight) that
gives them access to the IFR system.

10. Aren’t the overseas examples of ATC commercialization all in small or developing countries
with much less air traffic than the United States? How can this be relevant to the much larger,
more complex U.S. system?
32 Reason Foundation

Nearly all advanced western countries have commercialized their ATC systems over the past 15
years—including Australia, Canada, France, Germany, Switzerland, the United Kingdom, the
Benelux countries, and Scandinavia. What’s relevant is not so much total air traffic but the
complexity of that traffic. A recent international study examined pairs of terminal-area airspace
centers with equivalent traffic density (e.g., Philadelphia and Frankfurt, Washington and Toronto,
San Diego and Auckland), finding that the commercialized systems were more cost-effective, as
measured by cost per aircraft movement. Obviously, with our larger overall system and larger
business aviation sector, we must craft a solution that best fits our needs. But we are fortunate to be
able to draw on what has worked best in dozens of other countries.
BUSINESS JETS AND ATC USER FEES 33

About the Author

R obert W. Poole, Jr. is the director of transportation studies at Reason Foundation, a nonprofit
public policy think tank. He is the author or co-author of a half-dozen previous policy studies
on air traffic control reform, and produces the ATC Reform News electronic newsletter. He has
testified on ATC issues before House and Senate aviation subcommittees and has advised various
entities, including the DOT’s Executive Oversight Committee, the Mineta Commission, and the
White House National Economic Council on ATC reform issues. In 2000 he was a member of the
Bush/Cheney task force on transportation policy and served on the subsequent transition team. He
is a member of the GAO's National Aviation Studies Advisory Panel. He received his B.S. and
M.S. in engineering from MIT.

Other Related Reason Publications


Vaughn Cordle and Robert W. Poole, Jr., Resolving the Crisis in Air Traffic Control Funding,
Reason Foundation Policy Study No. 332, May 2005, http://www.reason.org/ps332.pdf.

Robert W. Poole, Jr., Why An Air Traffic Control Corporation Makes Sense, Reason Foundation
Policy Study No. 307, March 2003, http://www.reason.org/ps307.pdf

Robert W. Poole, Jr. and Viggo Butler, How to Commercialize Air Traffic Control, Reason
Foundation Policy Study No. 278, February 2001, http://www.reason.org/ps278.pdf

Robert W. Poole, Jr. and Viggo Butler, Reinventing Air Traffic Control: A New Blueprint for a
Better System, Reason Foundation Policy Study No. 206, May 1996,
http://www.reason.org/ps206.html
34 Reason Foundation

Endnotes

1
“EAO White Paper: Baseline NAS Demand and Capacity Scenarios for Direct Effects Models,”
Evaluations and Analysis Office, Joint Planning & Development Office, Feb. 3, 2005.
2
Thomas J. Donohue, untitled speech, Wings Club, New York, NY, April 27, 2005
(www.uschamber.com/press/speeches/2005/050427tjd_wingsspeech.htm)
3
Doug Arbuckle, et al., “U.S. Vision for 2025 Air Transportation,” Journal of Air Traffic Control,
January-March 2006, p. 15.
4
Arthur A. Shantz and Matthew Hampton, “National Airspace System Capital Investments Have Not
Reduced FAA Operating Costs,” Transportation Research Forum, March 8, 2005;
(www.trforum.org/forum/2005/schedule.php).
5
“National Airspace System: Experts’ Views on Improving the U.S. Air Traffic Control Modernization
Program,” GAO-05-333SP, Washington, DC: Government Accountability Office, April 2005.
6
Michael J. Harrison, “Air Traffic Control Facility Consolidation Strategies,” Proceedings of the 50th
Annual Conference, Air Traffic Control Association, November 2005.
7
Glen McDougall, Air Traffic Control Commercialization Policy: Has It Been Effective? (Ottawa,
Ontario: MBS Ottawa and George Mason University, Syracuse University, and McGill University)
January 2006.
8
There does not appear to be any direct relationship between aircraft weight and the cost of providing
ATC services to that aircraft. An important part of transportation economists' justification for user-fee
funding is to induce users to pay the costs they impose on a system, whether that system be highways,
airports, or airspace. Thus, a user fee system based on the underlying costs of the services provided
would better align incentives for making the best use of the scarce resource of safely controlled
airspace. Business aviation groups (such as NBAA) argue that business aviation is a marginal user of
ATC resources, and hence that if there is a shift to a cost-based system, those planes should pay only
marginal costs. There is legitimate debate on this question, though "marginal user" appears to be a better
description of the past than of a future filled with fractional and VLJ air taxi flights.
9
For planes in the Small category, we assumed that the annual 175,000 nautical miles are represented
entirely by trips equivalent to Boston to Chicago (BOS to ORD). For the larger categories, with longer
range, we assumed that half the trips are long (Washington, DC to San Francisco—IAD to SFO) and the
other half are BOS-ORD, with the total again being 175,000 nm.
10
“Aviation Reauthorization Information,” Washington, DC: Federal Aviation Administration, Sept. 2,
2005.
11
By using the Nav Canada formula for terminal and en-route charges, we do not mean to imply that their
formula, if applied unchanged to the U.S. ATC system, would yield the needed total revenue. Applied to
ATC transactions in Canada, it provides the full budget for that country's ATC system. Applied,
unchanged, to U.S. aviation activity, it might provide more or less than the ATO's budget. Tailoring a
version of the Nav Canada approach precisely to the U.S. system's revenue requirements was beyond
the scope of this study.
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